Donor-Advised Funds Become Popular Philanthropic Tools

One reason donor-advised funds have exploded in popularity for the philanthropically inclined is the ability of some major funds to take in complex assets like restricted stock, real estate or even cryptocurrency.

Fidelity Charitable—which experienced a massive 83% leap in new donors in 2017—converted $916 million of “non-cash” assets into funds that can be distributed to charities last year through its donor-advised fund, up from $796 million a year earlier, the nonprofit reported this week. Overall, new assets at Fidelity Charitable rose by $8.5 billion in 2017 from a $6.6 billion increase a year before.

Donor-advised funds are investment vehicles set up by nonprofits that allow individuals to make a tax-deductible, irrevocable grant. The assets in the funds are invested and then distributed over time to qualified charities.

One reason for the surge in non-cash assets into these funds? A big increase in valuations of assets like private equity, real estate, and cryptocurrency, says Pamela Norley, Fidelity Charitable’s president. “People have had an enormous amount of wealth creation,” Norley says.

Fidelity Charitable, which operates independently from Fidelity Investments, has a complex asset organization dedicated to handling illiquid assets. The effort has allowed the nonprofit to make an additional $4.7 billion in grants over time. The complex asset group takes responsibility for liquidating the assets, “and then the donor doesn’t have to pay capital gains on those distributions, and (the funds) go to philanthropy,” Norley says.

Because individuals can contribute non-cash assets to a donor-advised fund and not get hit with taxes, as they would if they gifted the funds to their private foundation or directly to a charity, “donor-advised funds have been a nice place to deal with the charitable gift of complex assets,” says Carol Kroch, national director of philanthropic planning in wealth advisory services at Wilmington Trust.

But Kroch cautions that disposing of illiquid assets is an “art form,” and requires expertise and knowledge. Fidelity Charitable and National Philanthropic Trust, among others, have the resources to sell illiquid assets, but not every donor-advised fund can. You want to make sure the fund can handle the sale of stock in your private company, for example, or even your stockpile of wheat.

Fidelity Charitable last year received a contribution of grain “that appreciated significantly,” Norley recalls. The donor was “very philanthropic, and worked with us to donate the commodity,” she says. “We were able to sell it pretty quickly and put those monies into a donor-advised fund so the individual could do some granting.”

Among cryptocurrency holders, Fidelity Charitable became known as a resource for liquidating virtual currency for cash that could in turn be donated to charity. The nonprofit began taking cryptocurrency donations in November 2015, and in 2016 collected only $7 million. Last year, the $11 million donated by June reached $22 million by the first week in December, and then surged to $69 million by the end of the year.

Donor-advised funds are a simple, tax-efficient way to deal with non-cash assets, as well as qualified stock and cash donations, yet they aren’t the desired choice for all investors.

Individuals and families who have $1 million or more in assets to set aside for philanthropy, and who have a long-term strategy that may, for example, include keeping their family involved in charitable giving for generations, may prefer to set up a private foundation, says Kroch, who adds that many of the private families she works with at Wilmington Trust prefer to go this route.

Many donor-advised funds do offer wealthier clients the option of keeping their own private investment manager in place, yet policies vary from fund to fund, and there’s no guarantee a given fund’s policies won’t change over time, Kroch says.

“A private foundation gives you 100% control over distribution decisions, governance and investment,” she says. “A donor-advised fund gets you a lot of the way there, but without that guarantee.”

At Fidelity, clients with at least $250,000 in a donor-advised fund can retain their private investment manager, while clients with at least $1 million are eligible for Fidelity Charitable’s private donor group. More than 3,000 accounts at the nonprofit are in private donor accounts, which provide individuals and families with a relationship manager to assist with managing their philanthropy, from vetting charities to working through what organizations would help them best meet their charitable goals, Norley says.

Also, Norley points out, 60% of the ultra-high-net worth individuals who invest with Fidelity Charitable have a private foundation as well. The donor-advised fund sits “side-by-side” with the foundation, and is utilized for grant making.

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Donor-Advised Funds Become Popular Philanthropic Tools

One reason donor-advised funds have exploded in popularity for the philanthropically inclined is the ability of some major funds to take in complex assets like restricted stock, real estate or even cryptocurrency.

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